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“The responsibility of tolerance lies in those who have the wider vision.” 

-George Eliot


So we have witnessed a roughly streak of risk appetite across the markets. A whopping 10 out of the last 13 weeks the S&P 500 has closed higher than the prior week’s close.  

US stocks have undergone a tight and steady ascent, aided and abetted by optimism (rather, the lack of renewed pessimism) in the eurozone and an ongoing corrective rally in the euro.    

I mean, there has been plenty of real reason to be pessimistic; but it’s almost as if investors have revisited an obviously irrational and fundamentally careless mindset. My diagnosis of this condition goes a little something like this:  

==> I’m fatigued by the slow-speed train wreck of deliberations aimed at rescuing the eurozone …

==> The amount of coverage lent to the Sovereign debt crisis and Greece is sickening, even if it is warranted …

==> I don’t want to miss the bus on another global central bank liquidity-induced market rally …

==> If there is actually a Greek default or some other systemic trigger of global market contagion, I’m sure I’ll hear about it …

When the time comes I’ll be able to take the needed steps to secure my money efficiently …  

In fact, I think I’ve written about this ‘mindset’ before … in explaining the potential for “black swans” post credit crunch 2008. (Of course, it is a contradiction of terms to be able to identify potential black swan events.) Bottom line: investors are willing to take on risk because they have become so saturated with warnings and forecasts that they’ve developed a sense of complacency, a false sense of security.  

Well, consider this another warning!      

Above is the VIX, a volatility index use to gauge investor fear and uncertainty. It’s back to low levels that have marked the floor since the 2008 financial crisis sent the vix into uncharted highs. In other words, investors are about as comfortable (complacent) as they’ve been in this era of risk.  

Moving to economics, consider this …  

LONDON, Feb 24 (Reuters) – Global steel production is experiencing its sharpest contraction  since the dark days of 2009, when the industry was gripped by the manufacturing freeze that followed the 2008 financial crisis.     

Global output in January shrank by 8 percent year-on-year as the slowdown evident over the closing stages of 2011 accelerated and deepened.  


In the euro zone itself output in January was down by 6 percent year-on-year with that in the region’s largest producer, Germany, tumbling by 9 percent.   

Steel – what’s the big deal?  

Obviously, it is a raw material that is critical to so many manufacturing applications. And obviously, contraction in manufacturing is not a welcomed event for investors betting on economic growth. But the steel story alone isn’t going to be a catalyst for risk-aversion that sends investors fleeing the markets.  

It is, however, a China story. And it is an example of the headwinds the Chinese economy (and the rest of the world) faces.  

China is at a point where they must build a substantial consumer class to make up for softening in external demand. Because while we see steel capacity shuttered in Europe as they enter recession, China also wrestles with overcapacity across many sectors that have been artificially buoyed by government investment initiatives.  

And now that the residential real estate bubble is deflating – intentionally or unintentionally – there will be a headwind pressing hard against the demand for steel, among other things. Oddly enough, the hope for the steel industry and continued production rests on the demand from social housing initiatives aimed at providing affordable housing to so many citizens who were priced out of the market as the real estate bubble inflated, despite the massive amount of vacant housing.  

Ultimately, China is experiencing a slowdown in growth and they are pinning growth hopes on the Chinese citizens’ capacity to increase consumption. But when purchasing power is diminished from inflation and a controlled currency, and when households bear the burden of the government’s investment strategy that funnels money into superficial investment projects instead of the consumer sector, the weight of this new responsibility appears even heavier.  

I do think investors are awaiting an actual default in Greece, or hard and irreversible evidence that the Sovereign debt crisis cannot be contained as expected, before they run for the exits. But I also think their complacency or indifference at this stage blinds them to the risk that China will majorly disappoint.  

To wit, there is another mindset out there:  

China always pulls through despite the warnings of imminent economic collapse; I’ll believe it when I see it.  

I hate to be cliché and say ‘this time is different’ … so I’ll just say ‘keep your eyes open this time.’